On May 24, 2016, HSBC Bank USA, N.A., in its capacity as Trustee of Merrill Lynch Alternative Note Asset Trust, Series 2007-0AR5 (“the Trust”), served a summons with notice on Merrill Lynch Mortgage Lending, Inc. (“Merrill”), Countrywide Home Loans, Inc. (“Countrywide”), and Bank of America, N.A. (“BofA”), in their respective capacities as sponsor, originator, and servicer of the Trust, alleging that the three Defendants discovered that mortgage loans securitized in the Trust breached certain representations and warranties and failed to notify the Trustee in accord with their contractual obligations. Specifically, HSBC alleges that Merrill, Countrywide, and BofA discovered the breaches through (i) the performance of their respective roles as issuer, originator, and servicer; and (ii) through their participation in multiple government investigations related to the origination, securitization, and servicing or mortgage loans. The summons with notice seeks $420 million in damages. Summons with Notice.
Litigation
Second Circuit Overturns Fraud Judgment against Bank of America and Former Countrywide Executive
On May 23, 2016, a three-judge panel of the Second Circuit Court of Appeals overturned a judgment of fraud against Bank of America, Countrywide, and former Countrywide executive Rebecca Mairone in U.S. v Countrywide Home Loans, Inc. In reversing the District Court and ruling for the Defendants, the Second Circuit vacated a $1.27 billion judgment against Bank of America and a $1 million judgment against Ms. Mairone. The Second Circuit panel held that the evidence at trial showed at most an intentional breach of contract, which is insufficient as a matter of law to constitute fraud under the federal mail and wire fraud statutes. Instead, to support a claim, the government was required, but failed, to prove that defendants’ intent at the time of contracting was not to comply with their contractual obligations. Orrick represented Ms. Mairone in connection with the appeal. Opinion.
Federal Appellate Court Reinstates RMBS Action Against Moody’s
On May 2, 2016, the First Circuit Court of Appeals reinstated a $5.9B suit brought by the Federal Home Loan Bank of Boston (“FHLBB”), alleging that Moody’s Corp and Moody’s Investor’s Service, Inc. (together, “Moody’s”) knowingly provided false ratings on certain Residential Mortgage-Backed Securities purchased by FHLBB. The case had been dismissed for lack of personal jurisdiction by Judge George A. O’Toole Jr. of the District of Massachusetts, who also held that the court could not transfer the case to another federal court where jurisdiction would be proper because 28 U.S.C. §1631 only permitted the transfer of cases dismissed for lack of subject matter jurisdiction, rather than personal jurisdiction.
The First Circuit vacated that decision, concluding that the plain language of 28 U.S.C. §1631, the statute’s legislative history, and case law from other Circuits all weighed in favor of a ruling that the statute also permits transfer where the claims at issue were dismissed on either personal or subject matter jurisdiction grounds. Accordingly, the First Circuit remanded the case to the district court to determine whether transfer was “in the interests of justice,” in accord with the statutory requirement for transfer under 28 U.S.C. §1631. Decision.
Bank of America Settles RMBS Actions for $190 Million
On April 25, 2016, the Federal Home Loan Bank of Seattle (“FHLBS”) agreed to a $190 million settlement with Bank of America in connection with multiple lawsuits filed in 2010 stemming from the sale of hundreds of millions of dollars of RMBS. FHLBS alleged that Bank of America made misstatements or omissions in connection with the issuance of the RMBS in violation of the Washington State Securities Act. Additional details of the settlement are not publicly available.
Second Circuit Reverses and Remands Trial Court’s Summary Judgment Order in Favor of Morgan Stanley in a CMBS Case
On April 27, 2016, the Second Circuit Court of Appeals vacated and remanded the district court’s summary judgment order entered in favor of defendant Morgan Stanley Mortgage Capital, Inc. in the Southern District of New York. Plaintiff Bank of New York Mellon Trust Company, N.A., as trustee of a CMBS deal, alleged that Morgan Stanley breached an environmental conditions contract representation, requiring Morgan Stanley to repurchase an $81 million mortgage loan. The Second Circuit reversed the trial court’s conclusion that Morgan Stanley was not contractually obligated to repurchase the mortgage loan because the Trustee’s duty to give “notice of cure” within three business days of becoming aware of a material breach was a condition precedent to Morgan Stanley’s repurchase obligation. The Second held that a request to cure a material breach was not a condition precedent under the contract. In so holding, the Second Circuit distinguished between the Mortgage Loan Purchase Agreement’s separate obligations of “notice of breach” and “request to cure.” As to the “request to cure” obligation, the Court found nothing that made it clear that Morgan Stanley’s remedy obligation does not arise until a request for cure is made. The Court remanded the case to the trial court to reassess the timeliness of the Trustee’s notice for cure, which was a fact issue that must be presented to the factfinder at trial to determine when the Special Servicer concluded its investigation. In addition, because request for cure is not a condition precedent, the jury would have to decide the question of substantial performance. The Court held that a reasonable jury could find that, even if there was some delay in requesting cure, it could determine that substantial performance occurred. Decision.
Justice Friedman of the New York Supreme Court Dismisses Two FHFA Repurchase Actions
On April 12, 2016, Justice Marcy Friedman of the New York Supreme Court granted motions to dismiss in two RMBS breach of contract actions filed by FHFA against Morgan Stanley ABS Capital I Inc. (“MSAC”) and Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”). In the decisions, he Court dismissed the actions on similar grounds and granted the parties the opportunity to brief claims for failure to notify, in light of the October 13, 2015 First Department’s decision in Nomura Home Equity Loan Inc. Series 2006-FM2 et al. v. Nomura Credit & Capital Inc.
Like Justice Friedman’s ruling last month in ACE Securities v. DB Structured Products, Inc., which we previously covered, the Court held that both actions were not rendered untimely by the Plaintiff’s failure to file repurchase demand condition precedent prior to the filing of the summons with notice. However, the FHFA, as certificate holder, lacked standing to commence the action and thus the Trustee’s cause of action was untimely because it did not relate back to the FHFA’s summons with notice. In so holding, the Court rejected the Trustee’s arguments in both cases that the action was timely commenced, and also that the accrual clause in the RMBS extended the statute of limitations, and that the federal Housing and Economic Recovery Act of 2008, applicable to certain actions brought by FHFA, extended the limitations period. Finally, the Court also held that no tolling agreements saved Trustee’s claims, and also dismissed the causes of action for breach of the implied covenant of good faith and fair dealing, breach of repurchase obligations, and anticipatory breach. Decision 116. Decision 134.
Goldman Sachs Set to Pay $5.1 Billion in RMBS Settlement
On April 11, Goldman Sachs agreed to pay roughly $5.1 billion in a settlement with federal and state officials regarding the marketing and sale of RMBS during the years leading up to the financial crisis. The settlement is divided into a $2.4 billion civil penalty, $1.8 billion for consumer relief and $875 million in cash. Cash payments will primarily be divided among the National Credit Union Administration, the Federal Home Loan Banks and the States of California, Illinois and New York. Goldman Settlement.
New York Supreme Court Dismisses ACE Action Re-Asserting Repurchase Claims against DB Structured Products
On March 29, 2016, Justice Marcy Friedman of the New York Supreme Court rejected the trustee’s attempt to renew previously dismissed claims in ACE Securities v. DB Structured Products, Inc. As we previously reported, the trustee re-filed this action after the First Department dismissed the prior lawsuit related to the same trust, a dismissal that the Court of Appeals later affirmed.
In granting the motion to dismiss, the court rejected the trustee’s reliance on CPLR 205(a) as grounds for reviving the previously dismissed lawsuit. The Court held that CPLR 205(a) allows only the same plaintiff that commenced the prior action to re-commence a second action under the terms of that rule. Because the prior action had been commenced by the certificateholders, not the trustee, the trustee was not the same plaintiff and could not take advantage of CPLR 205(a). The Court rejected the trustee’s argument that it and the certificateholders were attempting to litigate identical interests, holding that the certificateholders in the prior action did not possess a cause of action to which the trustee succeeded. The court also considered the defendant’s alternative argument that CPLR 205(a) was not available because the prior lawsuit was untimely. The prior lawsuit was filed on the six-year anniversary of the allegedly breached representations and warranties, but neither the trustee nor the certificateholders had complied with the contract’s notice and cure “repurchase protocol” at the time of filing, a failing that both the First Department and Court of Appeals relied upon in dismissing the prior case. The Court held that to the extent the dismissal was based on the non-compliance with the repurchase protocol, it should properly be characterized as a dismissal for failure to comply with a condition precedent, not a dismissal on timeliness grounds. However, the First Department also held that the trustee’s complaint in the prior lawsuit had been untimely because it did not relate back to the certificateholders’ summons with notice. Therefore, the trustee’s failure to file a timely complaint in the first lawsuit provided a second basis for why the trustee could not rely on CPLR 205(a) to re-file the previously dismissed lawsuit. Order.
Barclays and MassMutual Settle RMBS Litigation
On March 29, Barclays Capital Inc. and Massachusetts Mutual Life Insurance Co. jointly moved pursuant to a confidential settlement agreement for dismissal of an action brought by MassMutual. MassMutual brought claims under the Massachusetts Uniform Securities Act concerning $175 million in RMBS. MassMutual alleged that Barclays had made false representations about the quality and risk of default of the underlying loans. Motion for Dismissal. Complaint.
Federal Court Permits BlackRock’s Breach of Contract Claims to Proceed against BNY Mellon
On March 28, Judge George Daniels of the U.S. District Court for the Southern District of New York granted in part and denied in part Bank of New York Mellon’s motion to dismiss an action brought by BlackRock. BlackRock, as a holder in numerous trusts for which BNY Mellon serves as trustee, alleges that BNY Mellon failed to (i) provide notice of breaches of seller representations and warranties, (ii) enforce seller repurchase obligations, (iii) provide notice of events of default, and (iv) act prudently upon learning of events of default. The court exercised supplemental jurisdiction over state law claims concerning 243 trusts, holding that the claims arise out of the same operative facts as those of the federal claims concerning 17 other trusts. The court permitted BlackRock’s breach of contract claims to proceed, but dismissed fiduciary duty claims as duplicative of the contract claims. Judge Daniels also dismissed Trust Indenture Act claims in light of the Second Circuit’s holding that the TIA does not apply to the trusts like those at issue, and dismissed negligence and conflict of interest claims for failure to adequately state a claim. Decision.